Medicines and Related Substances Act, 1965
R 385
Banks Act, 1990 (Act No. 94 of 1990)RegulationsRegulations relating to BanksChapter II : Financial, Risk-based and other related Returns and Instructions, Directives and Interpretations relating to the completion thereof28. Market riskDirectives and interpretations for completion of monthly return concerning market risk (Form BA 320)Subregulation (7) Method 1: standardised approachSubregulation (7)(e) Matters relating to commodity risk |
(e) Matters relating to commodity risk
| (i) | For the measurement of a bank's exposure to commodity position risk arising from commodity positions held in either the bank's banking book or trading book, which commodity position risk may arise from positions held in respect of precious metals, agricultural products, minerals, oil or base metals, but not gold, since gold is subject to the requirements specified in paragraph (d) above, a bank may— |
| (A) | at the discretion of the bank, adopt the simplified approach specified in subparagraph (ii) below, which simplified approach shall be available for a bank that conducts only a limited amount of commodity business; |
| (B) | at the discretion of the bank, adopt the maturity ladder approach specified in subparagraph (iii) below, which maturity ladder approach— |
| (i) | separately captures forward gap and interest rate risk; |
| (ii) | shall be available for a bank that conducts only a limited amount of commodity business; |
| (C) | subject to the prior written approval of and such conditions as may be specified in writing by the Registrar, adopt the internal models approach specified in subregulation (8) below, which internal models approach shall ultimately be adopted by a bank that conducts material business in commodities, |
Provided that—
| (i) | the bank shall in the case of any spot or physical trading duly manage its exposure to directional risk that may arise from an adverse change in the spot price of open commodity positions; |
| (ii) | when the bank applies a portfolio strategy that involves forward and derivative contracts the bank shall duly manage its exposure, amongst others— |
| (aa) | to basis risk, that is, the risk that the relationship between the prices of similar but not identical commodities alters over time; |
| (bb) | to interest rate risk, that is, the risk of an adverse change in the carrying cost for forward positions and options; |
| (cc) | to forward gap risk, that is, the risk that the forward price may change due to reasons other than a change in interest rates; |
| (iii) | in all cases the bank shall duly manage its exposure to counterparty credit risk in respect of all relevant over-the-counter derivative contracts; |
| (iv) | the bank shall report any relevant interest rate or foreign exchange exposure arising from the bank's funding of commodity positions in accordance with the relevant requirements specified in this subregulation (7); |
For example, when a commodity forms part of a forward contract, the bank shall report any interest rate exposure or foreign currency exposure that arises from the other leg of the contract in accordance with the relevant requirements specified in this subregulation (7).
| (v) | the bank may omit from its commodity risk calculation, positions that are purely stock financing, that is, when physical stock has been sold forward and the cost of funding has been locked in until the date of the forward sale, provided that the relevant position shall be subject to the relevant interest rate and counterparty risk requirements. |
(ii) Matters relating to the simplified approach
A bank that adopted the simplified approach for the measurement of the bank's exposure to commodity risk arising from commodity positions held in either the bank's banking book or trading book—
| (A) | shall include in all relevant calculations all commodity derivative contracts and all off-balance sheet positions that are affected by changes in commodity prices, including any commodity future, any commodity swap contract, and options when the bank adopts the "delta plus" method specified in paragraph (f)(iii) below, provided that when the bank adopts an approach other than the delta-plus approach in order to measure the bank's exposure to options risk, the bank shall exclude from the simplified approach all relevant options and their associated underlying instruments; |
| (B) | may in order to calculate the bank's open position in respect of a particular commodity, offset or net any relevant long position and short positions in the specific commodity; |
| (C) | shall not in the calculation of the bank's open position in respect of a particular commodity offset or net positions in different commodities; |
| (D) | shall express each relevant commodity position, that is, any relevant spot or forward position, in terms of the relevant standard unit of measurement, which standard unit of measurement, for example, may be barrels, kilograms or grams, and convert the relevant net position in the specific commodity into the reporting currency at current spot rates; |
| (E) | shall calculate and maintain a capital requirement equal to 15 per cent of the relevant net position in the specific commodity, irrespective whether the net position is a long or short position; |
| (F) | shall in order to protect the bank against basis risk, interest rate risk and forward gap risk, based on the current spot price of all relevant positions, calculate and maintain an additional capital requirement in respect of each relevant commodity equal to 3 per cent of the bank's gross positions, that is, the sum of the relevant long positions and short positions in respect of the particular commodity. |
(iii) Matters relating to the maturity ladder approach
A bank that adopted the maturity ladder approach for the measurement of the bank's exposure to commodity risk arising from commodity positions held in either the bank's banking book or trading book—
| (A) | shall include in all relevant calculations all commodity derivative contracts and all off-balance sheet positions that are affected by changes in commodity prices, including any commodity future, any commodity swap contract, and options when the bank adopts the "delta plus" method specified in paragraph (f)(iii) below, provided that— |
| (i) | when the bank adopts an approach other than the delta-plus approach in order to measure the bank's exposure to options risk, the bank shall exclude from the maturity ladder approach all relevant options and their associated underlying instruments; |
| (ii) | in the case of any relevant future or forward contract relating to a particular commodity the bank shall incorporate into its measurement system the relevant notional amount of barrels, kilos or other standard unit, as the case may be, and shall, based on the relevant expiry date of the relevant contract, assign the said contract to the relevant time band; |
| (iii) | in the case of any commodity swap contract in respect of which one leg is a fixed price and the other leg the current market price, the bank shall incorporate the said contract into its measurement system as a series of positions equal to the notional amount of the said contract, with one position corresponding with each payment on the swap and assigned to the relevant maturity ladder and relevant time band; |
| (iv) | in the case of a commodity swap contract in respect of which the relevant legs are in different commodities, the bank shall incorporate the relevant commodity positions into the relevant maturity ladder for each relevant commodity, that is, the bank shall not apply offsetting between different commodity positions; |
| (B) | may, in order to calculate the bank's open position in respect of a particular commodity, offset or net any relevant long position and short positions in the specific commodity; |
| (C) | shall not in the calculation of the bank's open position in respect of a particular commodity offset or net positions in different commodities; |
| (D) | shall express each relevant commodity position, that is, any relevant spot or forward position, in terms of the relevant standard unit of measurement, which standard unit of measurement may be barrels, kilograms or grams; |
| (E) | shall convert any relevant net position in respect of each relevant commodity at current spot rates into the required reporting currency; |
| (F) | shall in respect of each relevant commodity apply a separate maturity ladder in accordance with the relevant requirements specified in table 7 below, that is, based on the requirements specified in table 7 below, the bank shall capture all relevant positions relating to a particular commodity, provided that— |
| (i) | the bank shall express any relevant position in the relevant standard unit of measurement for the said commodity; |
| (ii) | the bank shall capture any physical stock in the first time band; |
| (iii) | in order to capture forward gap and interest rate risk within a particular time band, which risks together are often referred to as curvature or spread risk, all relevant matched long positions and short positions in each relevant time band shall be subject to a specified capital requirement; |
| (iv) | in respect of each relevant time band, the bank shall multiply the sum of short positions and long positions that are matched firstly with the relevant spot price for the particular commodity and secondly with the spread rate specified for the particular time band, as set out in table 7 below; |
| (v) | the bank may subsequently carry forward and offset residual net positions from nearer time bands against exposures in time bands that are further out, provided that— |
| (aa) | in order to recognise that hedging of positions across different time bands is imprecise the bank shall in respect of each specified time band apply a further capital requirement equal to 0.6 per cent of the residual net position carried forward; |
| (bb) | based on the spread rates specified in table 7 below, the bank shall apply an additional capital requirement in respect of each matched amount created by carrying residual net positions forward; |
| (vi) | in respect of the relevant residual long or short positions that remain at the end of the aforementioned process the bank shall apply a capital requirement equal to 15 per cent. |
Table 7
Time-bands and spread rates
|
Time band |
Spread rate |
|
0 ≤ 1 month |
1,50% |
|
> 1 ≤ 3 months |
1,50% |
|
> 3 ≤ 6 months |
1,50% |
|
> 6 ≤ 12 months |
1,50% |
|
> 1 ≤ 2 years |
1,50% |
|
> 2 ≤ 3 years |
1,50% |
|
> 3 years |
1,50% |
For example, assume that, based on the relevant requirements specified above, the positions in respect of a particular commodity are as follows:
|
Time band |
Position |
Spread rate |
Capital calculation |
Capital requirement |
|
0 ≤ 1 month |
|
1,50% |
|
|
|
> 1 ≤ 3 months |
|
1,50% |
|
|
|
> 3 ≤ 6 months |
Long = R800 Short = R1000 |
1,50% |
Matched position is R800 long plus R800 short x 1,50% |
24,00 |
|
|
|
|
R200 short carried forward to the 1 to 2 year time band means— R200 x 2 x 0,6% |
2,40 |
|
> 6 ≤ 12 months |
|
1,50% |
|
|
|
> 1 ≤ 2 years |
Long = R600 |
1,50% |
Matched position is R200 long plus R200 short x 1,50% |
6,00 |
|
|
|
|
R400 long carried forward to the more than 3 year time-band means R400 x 2 x 0.6% |
4,80 |
|
> 2 ≤ 3 years |
|
1,50% |
|
|
|
> 3 years |
Short = R600 |
1,50% |
Matched position is R400 long plus R400 short x 1,50% |
12,00 |
|
|
|
|
Net residual position is R200 which means R200 x 15% |
30,00 |
The bank's aggregate capital requirement in respect of the relevant commodity shall be equal to R79,20.
| (iv) | Matters relating to internal models |
A bank that obtained the approval of the Registrar to adopt the internal models approach for the measurement of the bank's exposure to market risk arising from commodity positions held in either the bank's banking book or trading book—
| (A) | shall continuously comply with the relevant requirements specified in subregulation (8) below; |
| (B) | may, based on empirical correlations that fall within a range specified in writing by the Registrar and subject to such conditions as may be specified in writing by the Registrar, offset all relevant long positions and short positions in different commodities; |
| (C) | hall ensure that the bank's models duly capture and reflect the impact of all relevant market characteristics, including any relevant delivery dates and the scope provided to traders to close out positions. |
